Why managing an investment portfolio is like trying to stay married!

Published: March 11, 2021 at 12:53 pm

In this article aimed at new investors, we compare managing an investment portfolio with the task of staying married. If you spend some time in an investment forum, you will notice a distinct pattern: members want the best mutual fund to invest in for the next 10 years or 15 years; they want to know the stocks that will do well in the next decade; the best health insurance policy; the best life insurance policy etc.

The only truthful answer to these questions is no idea! No one knows; Insurance purchases are a leap of faith (by both the buyer and seller). A mutual fund or stock purchase (or redemption) is also a leap of faith, at least eventually.

The big advantage of keeping insurance and investment separate is, we can replace bad investments, but replacing bad insurance is difficult if not impossible. Managing an investment portfolio involves several tasks.

Steps in managing an investment portfolio

  • Identify the need
  • Be clear about when we want the money.
  • What is the association inflation?
  • Should inflation be a benchmark for portfolio returns? (Yes for 10Y plus goals and no for goals up to 5Y or so and ‘sort of’ for intermediate goals)
  • What asset allocation can balance the amount of money we can invest and get a return close to the desired level
  • Map out an asset allocation plan
  • Identify product categories
  • Identify products

Those who have not yet done this exercise and would like to start from scratch: Basics of portfolio construction: A guide for beginners

All this is standard preparatory stuff. Many new investors make the mistake of jumping to products, and even those who bother to do a proper goal-planning exercise assume their job is done after they start investing.


Build a complete financial plan with our Robo Advisory Tool. More than 1000 investors and financial advisors use it!
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)


New Tool! => Track your mutual funds and stocks investments with this Google Sheet!

Only a few years into a marriage do we appreciate the difference between getting married and staying married. In our desire to find a partner, we tend to showcase our ‘best side’. Only when we encounter the vicissitudes of life together, we appreciate that staying married takes effort, constant adjustment and sacrifice. It is hardly the bed of roses that some newly-wed couples assume it is on social media. And yes, a photograph of a happy couple does not mean they are happy!

Just like a marriage can never be taken for granted and requires constant effort, an investment portfolio also requires constant maintenance. I am not referring to looking at it daily and calculate XIRR five hours after investing!

Regular portfolio maintenance has two aspects: Regular goal-based rebalancing’ appreciating where we are with respect to our goal targets. These are standard tasks.

There are several non-standard tasks, as well. Both can be compared to the effort required in staying married (emotionally wed, not just legally). Even the best-laid plan needs adjustments and ‘play it by the ear’ actions. There could be a few years of bumper returns from an asset class or a few years of no returns. How will this affect our investments?

Sudden changes in tax laws, economic circumstances, income, a sudden drop in performance of a mutual fund or stock etc. All these may require changes in the way we invest. It is quite similar to how a couples bonding evolves: a change in one person may require an adjustment in the other. There is no way to get trained in this. We need to expect it and act quickly.

This is the reason why there is no best stock or best mutual fund, or best investment strategy out there to invest and forget. We can analyse all we want, but future performance is always unknown, and intervention is an eventuality. It is the same as getting married. The data available before a couple gets hitched is most often scanty: Only when we enter the union, we encounter new and surprising facets of a partner.

Of course, goal-based portfolio maintenance can be outsourced to a SEBI registered fee-only advisor. Sadly very few advisors highlight the importance of active portfolio management. Anyone can start a 60% equity, 40% debt portfolio with index funds and PPF. An advisor is not necessary for that. This is the getting married part.

The staying married part is a complete unknown: mistakes are possible in portfolio construction, perhaps even inevitable like a marriage. How the couple reacts to this; how an investor or advisor handles this will define the rest of the journey. In my opinion, a good chunk of the advisory fee is just for this navigation, but many investors are unaware of this, and advisors do not advertise this enough.

In summary, for every hour spent worrying about which insurer to choose, which mutual fund/stock to buy, investors should spend three-four hours learning about how to review these purchases, review their impact on the overall portfolio and understand that investing is a journey into the unknown just like a marriage where success is measured in terms of course-corrections, not destinations.

 

Do share this article with your friends using the buttons below.

Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)
 
Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
  Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)